Short Lease – Buying From A Dead Leaseholder

I recently had an enquiry from an investor who was looking at buying a flat with a 70 year unexpired term on the lease; a short lease. The leaseholder had recently died and his mum and sister were selling the flat.

Here’s what I advised.

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Further to our discussion, I attach the Freehold and Leasehold titles which I downloaded from Land Registry .

You’ll note the freeholder is Mr C. This might be good … or bad … because an individual may not know the extension process and may agree a good deal … or the individual may be scared by the process and refuse to talk. But at least it isn’t one of the institutional landlords, who would give you a hard time on the extension process.

The leaseholder is Mr A. You indicated that he has died – but this doesn’t change the fact that he is the leaseholder. He will remain the leaseholder until the lease is assigned to a purchaser. I suspect therefore the mother and sister are dealing with the flat as executors, rather than new leaseholders – as no change of ownership has been registered at Land Registry.

I suggest your course of action should therefore be (provided the deal is a good deal and meets your criteria):

Once the Notice is served, you take over the negotiations with the freeholder – and agree the terms for the extension of the short lease

Complete the lease extension and the purchase on the same day, with your mortgage attached to the extended lease

As we discussed, the leaseholder has not owned the flat for two years. According to the title document he purchased on 12th February 2013, registered 18th March 2013. Consequently the leaseholder cannot force the freeholder to extend (via the Section 42 route) until after 12th February 2015. You may therefore need to revise the above to:

Agree to a conditional exchange, with a delayed completion

Agree a “Licence to Occupy” allowing you and/or your tenant to occupy the flat until completion

Pay a monthly Licence Fee to the leaseholder – to cover the ground rent, service charge, etc

Let the flat on a similar Licence to your ‘tenants’

Informally negotiate with the freeholder to see if a commercial agreement can be reached on the extension

If necessary serve the Notice and then formally negotiate with the freeholder – and agree the terms for the extension of the short lease

Complete the lease extension and the purchase on the same day, with your mortgage attached to the extended lease

Terminate the Licence with your ‘tenants’ and replace with an Assured Shorthold Tenancy

A note of caution : Check the current mortgage (if any) allows for the flat to be let out.

When negotiating with the freeholder remember:
The Section 42 process provides for a 90 year extension to the present short lease term … and the ground rent reviewed to a peppercorn … for the calculated premium

You may not need +90 years and could therefore agree a shorter extension for a lower premium (perhaps just extend to 125 or 99 years)

You may be prepared to pay a ground rent; say £300pa. This would add to the capital value of the freehold (by roughly 10x the ground rent) so negotiate an appropriate further reduction in premium; e.g. £300pa G/R … £2,000 reduction

Finally, doing a commercial deal now will put money in the freeholder’s pocket NOW, not in six months’ time.

Lastly, remember you are required to pay the freeholder’s reasonable legal and valuation costs – once the Section 42 Notice has been served and you’re forcing the extension of the short lease. Allow £2,000 or so … and a similar amount for you own fees.

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About Bernie Wales

Bernie is 'The Leasehold Expert' and can help to resolve whatever leasehold issues you may be having. He always offers great advice and his Property Management Company provide a pragmatic and efficient management service for leaseholders and for those looking to set up their own Residents Association in London, Southampton and the South.